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K-Swiss (KSWS)Stock (Apparel - Footwear & Accessories Industry, Consumer Products Industry, Fashion Industry)
K-Swiss is a Los Angeles-based manufacturer of athletic and casual footwear, apparel, and accessories. In 2007, K-Swiss sold 14,195,000 pairs of shoes at an average wholesale price of $28.05 each.[1] Operating through two brands, K-Swiss and Royal Elastics, K-Swiss makes most of its money by selling its products at wholesale rates to large retailers, pro shops, and specialty stores; however, it also sells directly to the consumer through its website. With 2007 revenues of $410 million, K-Swiss is much smaller than major competitors Nike (NKE) and Adidas AG (ADDYY), which had 2007 revenues of $13.7 billion and $16 billion, respectively.
Over the past three years, K-Swiss's revenues have fallen from $508.6 million in 2005 to $410.4 million in 2007. This is largely result of slowing growth in the U.S. footwear market (2% growth in 2007 vs 5% growth in 2006) and stiff competition from Nike and Adidas, which held a combined 57% share of the global market for athletic footwear.[2][3] However, K-Swiss is in the midst of a multi-year turnaround plan that the company hopes will revitalize declining domestic sales while continuing to grow international sales. Among its plans are the development of new products and a bold marketing campaign; in preparation for the costs its plan will entail, K-Swiss has built up cash reserves of more than $290 million and remained debt-free as of 2007.[4] The success or failure of this turnaround will have a great impact on K-Swiss's future in the maturing domestic footwear market.
[edit] Company OverviewK-Swiss 2007 Annual Report[5] K-Swiss manufactures 92% of its footwear in China, 6% in Thailand, and 2% in Taiwan.[6] It generates revenues by selling this footwear, along with a limited line of apparel and accessories, to different types of retailers. As a result of lagging sales (domestic sales fell 34% in the fourth quarter alone), company revenues and operating income for 2007 were down 18% and 67%, respectively.[7] Over the past several years, K-Swiss has become an increasingly international company. In 2007 alone, domestic revenues fell 36%, with international revenues increasing by 14%. [8] 50% of 2007 sales came from international markets, compared to 35% in 2006 and 24% in 2005.[9] The first quarter of 2008 followed this trend, with 60% of sales being international. [10] Like some other footwear companies, K-Swiss works closely with Foot Locker (FL), which accounted for 13% of all K-Swiss sales in 2007. However, the company has been reducing its exposure to the retailer. In 2006 and 2005 respectively, Foot Locker accounted for 15% and 18% of revenues.[11] While K-Swiss does have other big customers, no one else accounts for more than 10% of revenues. K-Swiss 2007 Annual Report[12] At the end of the 2007 fiscal year, the company had $291.2 million in cash on its balance sheet, compared to $260.2 million in 2006.[13] In addition, K-Swiss has managed to remain debt free. Since 2003, the only year the company had debt was 2004 ($6.8 million). This was quickly paid off and K-Swiss was debt-free again by the end of 2004.[14] [edit] K-SwissThe K-Swiss brand is the profit driver for this company. It accounts for nearly all of the company's revenue, with $387.42 million in sales in 2007. The brand's signature shoe is the K-Swiss Classic, a casual shoe that has had the same basic design since 1966. The Classic typically represents roughly 70% of brand revenues. The brand also competes in the tennis, training, and children's shoes markets, who have repectively accounted for 7%, 5%, and 18% of revenues for the past three years.[15] [edit] Royal ElasticsRoyal Elastics is a wholly-owned subsidiary that was acquired by K-Swiss in 2001. This brand specializes in making footwear that has no laces; instead, the shoes have a "slip on" design a stretch to fit one's foot. Royal Elastics forms a relatively small part of K-Swiss's overall business. In 2007, Royal Elastics had revenues of $15.9 million (3.87% of total revenue), up from $11.9 million in 2006 (2.37%).[16] [edit] Trends and Forces[edit] K-Swiss banking on success of turnaround planIn 2007, K-Swiss saw its stock price fall by almost 50% while in the midst of its turnaround plan.[17] This drop was mainly due to an overall decline in sales, as well as declining futures orders (orders placed in advance) and backlogs. However, the future is not lost for K-Swiss because it is debt-free and has available cash. Much of this money will go towards marketing endeavors, such as K-Swiss' planned 2008 "Keep It Pure" campaign, and new shoe designs. This will work towards the goal of revitalizing K-Swiss' lagging domestic sales, as well as to bolster its rising international sales. For example, the company is sponsoring the first K-Swiss China Ironman competition. K-Swiss will also be making a move into the running market, which represents roughly 30% of the global footwear market. If any of these marketing and product development ventures fail, the likelihood that K-Swiss's turnaround plan will be successful at stimulating sales will diminish. [edit] U.S. footwear market maturingK-Swiss 2007 Annual Report[18] While K-Swiss's international sales have grown over the past few years, its domestic sales have declined. From 2005 to 2006, domestic sales fell 16.2%. They fell again from 2006 to 2007 by 36.5%.[19] This can partly be attributed to the maturity of the U.S. footwear industry. Growth of industry sales between 2007 and 2006 was only 2%, compared to 5% between 2006 and 2005.[20] At the same time, the top three players in the industry (Nike, adidas, and Puma) hold nearly 65% of U.S. market share.[21] Given the maturing footwear market in the U.S. and the superior financial strength of some of the company's competitors, rebuilding domestic sales will be a difficult task. If it is not successful, K-Swiss can choose to refocus its efforts on continuing growth of international sales rather than reclaiming lost market share in the U.S. market. Many footwear companies allow their buyers to place orders in advance, and backlogs are any orders set to ship within 6 months. This system allows investors to take a slight peek into the future in terms of the company's sales. For K-Swiss, backlog at the end of 2007 was $147.8 million, a 12.5% decrease from the $168.9 million backlog at the end of 2006. The reason behind the fall was a 40% decrease in domestic backlog (international backlog increased 14%).[22] Additionally, the backlog at the end of the first quarter of 2008 was down 46% domestically (down 2.8% internationally), compared to the backlog at the same time in 2007. Note that backlogs are not always indicative of future sales since buyers can cancel orders at any time without financial penalty. [edit] Certain shareholders have a lot of influence over company decisionsAt the end of 2007, K-Swiss' President and CEO Steven Nichols had 70% of all stockholder voting power.[23] This would allow him to greatly influence any issue that might come to a stockholder vote, such as possible mergers, elections of directors, and corporate decisions. [edit] Competition and Market ShareFor comparison purposes, K-Swiss had 2007 revenues of $410.4 million.
The pie chart below shows that K-Swiss has 1.8% market share of the global athletic footwear market. It's share of the global athletic apparel market is not significant.[26] Commerzbank Equity Research[27]
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